What types of investments are used by the Financial REITs to earn money
for their shareholders?
Financial REITs invest in several types of financial assets, such as mortgage
backed securities (MBS), as well as originating mortgages, and some companies
engage in raising money for private and public companies and lending through
How do you differentiate between the stocks in the Financial REIT group?
I always take a fundamental approach to my analysis, and also contrast
the companies by valuation and the composition of their portfolios. Dividend
coverage, as well, is very important to the choice of stocks in this group.
Not all Financial REITs should be treated equally by investors. In the
MBS area, for example, I think the sub-prime market is going to outperform
the prime market, as it is not as interest rate sensitive as the prime
market. For the structured finance group, interest rate increases are not
much of a risk, but credit risk is important, if a borrower were to default
on a loan.
Taxable earnings is what drives the dividend for a Financial REIT stock.
For GAAP earnings, companies delay the recognition of income, whereas with
taxable income, gains are recognized up front. Trends in taxable earnings
are the signal for changes in the dividend. (REITs are required to pay
out 90% of their taxable earnings as dividends to their shareholders).